UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


~~[X]~~ þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


		For the quarterly period ended ~~September 30, 2004~~March 31, 2005


~~[ ]~~ o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


		For the transition period from to

		Commission File Number: 000-50058

Portfolio Recovery Associates, Inc.

(Exact name of registrant as specified in its charter)


Delaware		75-3078675

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

120 Corporate Boulevard, Norfolk, Virginia		23502

(Address of principal executive offices)		(zip code)

(888) 772-7326

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ~~[X]~~þ NO ~~[ ]~~o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES ~~[X]~~þ NO ~~[ ]~~o

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding as of ~~October 21, 2004~~April 19, 2005

Common Stock, $0.01 par value		~~15,427,389~~15,579,610

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED ~~STATEMENTS OF FINANCIAL POSITION~~BALANCE SHEETS

~~September 30, 2004~~March 31, 2005 and December 31, ~~2003~~
2004

(unaudited)


	September 30,		December 31,		March 31,		December 31,
	2004		2003		2005		2004
Assets

Cash and cash equivalents	$	56,765,251	$	24,911,841	$	61,093,438	$	24,512,575
Investments						—		23,950,000
Finance receivables, net		95,311,731		92,568,557		107,344,401		105,188,906
Property and equipment, net		6,033,162		5,166,380		6,056,735		5,752,489
Deferred tax asset		—		2,009,426
Income tax receivable		—		351,861
Goodwill						6,397,138		6,397,138
Intangible assets, net						5,873,980		6,318,838
Other assets		827,002		1,385,706		2,716,936		3,056,023


Total assets	$	158,937,146	$	126,393,771	$	189,482,628	$	175,175,969


Liabilities and Stockholders’ Equity

Liabilities:
Accounts payable	$	1,175,776	$	1,290,332	$	1,753,492	$	1,413,726
Accrued expenses		1,213,432		513,687		1,703,042		1,563,285
Income taxes payable		147,729		—		2,765,676		182,221
Accrued payroll and bonuses		3,916,275		3,233,409		3,128,263		4,475,919
Deferred tax liability		9,719,605		—		15,676,237		13,650,722
Long-term debt		2,049,746		1,656,972		1,797,403		1,924,422
Obligations under capital lease		626,978		551,325		525,878		576,234

Total liabilities		18,849,541		7,245,725		27,349,991		23,786,529
Commitments and contingencies (Note 8)

Commitments and contingencies (Note 9)

Stockholders’ equity:
Preferred stock, par value $0.01, authorized shares, 2,000,000, issued and outstanding shares - 0		—		—		—		—
Common stock, par value $0.01, authorized shares, 30,000,000, issued and outstanding shares - 15,352,475 at September 30, 2004, and 15,294,676 at December 31, 2003		153,525		152,947
Common stock, par value $0.01, authorized shares, 30,000,000, issued and outstanding shares - 15,579,610 at March 31, 2005, and 15,498,210 at December 31, 2004						155,796		154,982
Additional paid in capital		97,320,816		96,117,932		102,728,402		100,905,851
Retained earnings		42,613,264		22,877,167		59,248,439		50,328,607


Total stockholders’ equity		140,087,605		119,148,046		162,132,637		151,389,440


Total liabilities and stockholders’ equity	$	158,937,146	$	126,393,771	$	189,482,628	$	175,175,969

The accompanying notes are an integral part of these consolidated financial statements.

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED INCOME STATEMENTS ~~OF OPERATIONS~~

For the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~

(unaudited)


	Three Months			Three Months			Nine Months			Nine Months			Three Months			Three Months
	Ended			Ended			Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,			March 31,			March 31,
	2004			2003			2004			2003			2005			2004
Revenues:
Income recognized on finance receivables	$	27,069,524		$	21,388,674		$	77,867,413		$	59,624,690		$	32,249,670		$	23,907,586
Commissions		1,216,054			784,411			3,826,564			2,266,998			3,528,698			1,357,247


Total revenue		28,285,578			22,173,085			81,693,977			61,891,688			35,778,368			25,264,833

Operating expenses:
Compensation and employee services		9,154,696			7,369,517			26,902,987			21,441,422			10,860,931			8,537,259
Outside legal and other fees and services		5,347,702			3,885,920			15,038,953			9,979,781			7,161,783			4,241,301
Communications		840,321			702,739			2,658,619			2,003,116			1,057,899			1,007,504
Rent and occupancy		434,541			317,300			1,296,577			872,260			475,765			428,998
Other operating expenses		648,512			392,872			2,028,266			1,321,832			752,854			690,651
Depreciation		487,757			383,071			1,398,091			1,054,253
Depreciation and amortization														940,721			447,678


Total operating expenses		16,913,529			13,051,419			49,323,493			36,672,664			21,249,953			15,353,391


Income from operations		11,372,049			9,121,666			32,370,484			25,219,024			14,528,415			9,911,442

Other income and (expense):
Interest income		77,259			586			105,841			28,811			95,612			3,583
Interest expense		(69,383	)		(83,989	)		(206,451	)		(243,226	)		(63,894	)		(69,387	)


Income before income taxes		11,379,925			9,038,263			32,269,874			25,004,609			14,560,133			9,845,638

Provision for income taxes		4,405,160			3,509,070			12,533,777			9,732,395			5,640,301			3,834,530


Net income	$	6,974,765		$	5,529,193		$	19,736,097		$	15,272,214		$	8,919,832		$	6,011,108


Net income per common share
Basic	$	0.45		$	0.36		$	1.29		$	1.07		$	0.57		$	0.39
Diluted	$	0.44		$	0.35		$	1.25		$	0.97		$	0.55		$	0.38
Weighted average number of shares outstanding
Basic		15,341,801			15,148,978			15,322,675			14,311,587			15,531,779			15,303,886
Diluted		15,831,660			15,750,647			15,793,935			15,697,162			16,152,162			15,774,487

The accompanying notes are an integral part of these consolidated financial statements.

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~

(unaudited)


	2004			2003			2005			2004
Operating activities:
Net income	$	19,736,097		$	15,272,214		$	8,919,832		$	6,011,108
Adjustments to reconcile net income to cash provided by operating activities:
Increase in equity from vested options and warrants		456,379			302,380			133,038			124,916
Income tax benefit from stock option exercises		437,514			15,397,882			777,137			149,491
Depreciation		1,398,091			1,054,253
Deferred tax expense (benefit)		11,729,031			(5,700,964	)
Depreciation and amortization								940,721			447,679
Deferred tax expense								2,025,515			3,685,038
Changes in operating assets and liabilities:
Other assets		558,704			(132,918	)		339,086			(90,193	)
Accounts payable		(114,556	)		(209,162	)		339,766			(634,709	)
Income taxes		499,590			(2,793,528	)		2,583,455			(5,643	)
Accrued expenses		699,745			(149,447	)		139,757			(121,504	)
Accrued payroll and bonuses		682,866			(477,920	)		(1,347,656	)		(1,536,796	)


Net cash provided by operating activities		36,083,461			22,562,790			14,850,651			8,029,387


Cash flows from investing activities:
Purchases of property and equipment		(1,967,964	)		(2,129,692	)		(800,109	)		(862,307	)
Acquisition of finance receivables, net of buybacks		(37,626,129	)		(50,849,497	)		(17,735,629	)		(14,678,341	)
Collections applied to principal on finance receivables		34,882,955			26,539,314			15,580,134			11,619,112
Sales of auction rate certificates								23,950,000			—

Net cash used in investing activities		(4,711,138	)		(26,439,875	)

Net cash provided by/(used in) investing activities								20,994,396			(3,921,536	)


Cash flows from financing activities:
Public offering costs		—			(386,963	)
Proceeds from exercise of options and warrants		309,570			586,000			913,191			124,790
Proceeds from long-term debt		750,000			975,000			—			750,000
Payments on long-term debt		(357,226	)		(196,884	)		(127,019	)		(110,949	)
Payments on capital lease obligations		(221,257	)		(228,439	)		(50,356	)		(92,684	)


Net cash provided by financing activities		481,087			748,714			735,816			671,157

Net increase/(decrease) in cash and cash equivalents		31,853,410			(3,128,371	)

Net increase in cash and cash equivalents								36,580,863			4,779,008

Cash and cash equivalents, beginning of period		24,911,841			17,938,730			24,512,575			24,911,841


Cash and cash equivalents, end of period	$	56,765,251		$	14,810,359		$	61,093,438		$	29,690,849


Supplemental disclosure of cash flow information:
Cash paid for interest	$	206,451		$	240,503		$	63,894		$	69,387
Cash paid for income taxes	$	280,642		$	1,219,772		$	254,950		$	5,643

Noncash investing and financing activities:
Capital lease obligations incurred	$	296,910		$	362,813		$	—		$	296,910

The accompanying notes are an integral part of these consolidated financial statements.

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Business:

Portfolio Recovery Associates, LLC (“PRA”) was formed on March 20, 1996. Portfolio Recovery Associates, Inc. (“PRA Inc”) was formed in August 2002. On November 8, 2002, PRA Inc completed its initial public offering (“IPO”) of common stock. As a result, all of the membership units and warrants of PRA were exchanged on a one to one basis for warrants and shares of a single class of common stock of PRA Inc. PRA Inc now owns all outstanding membership units of PRA, ~~and~~ PRA Receivables Management, LLC (d/b/a Anchor Receivables Management) (“Anchor”) and PRA Location Services, LLC (d/b/a IGS Nevada) (“IGS”). PRA Inc, a Delaware corporation, and its subsidiaries (collectively, the “Company”) purchases, collects and manages portfolios of defaulted consumer ~~receivables.~~receivables and provides asset-location and debt resolution services. The defaulted consumer receivables the Company collects are either purchased from the sellers of finance receivables or are collected on behalf of clients on a commission fee basis. This is primarily accomplished by maintaining a staff of highly skilled collectors whose purpose is to locate and contact the customers and arrange payment or resolution of the debt. ~~Secondarily, the~~The Company has also contracted with independent attorneys with which the Company can undertake legal action in order to satisfy the outstanding debt.

The consolidated financial statements of the Company include the accounts of PRA Inc, PRA, PRA Holding I, Anchor and ~~Anchor.~~IGS.

The accompanying unaudited financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. In the opinion of the Company, however, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s ~~financial position~~balance sheet as of ~~September 30, 2004,~~March 31, 2005, its ~~results of operations~~income statements for the three ~~and nine~~ month periods ended ~~September 30,~~March 31, 2005 and 2004 and ~~2003, and~~ its statements of cash flows for the ~~nine~~three month periods ended ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ respectively. The ~~results of operations~~income statements of the Company for the three ~~and nine~~ month periods ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~ may not be indicative of future results. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as ~~amended,~~ filed for the year ended December 31, ~~2003.~~2004.

2. Finance ~~Receivables:~~Receivables, net:

The Company ~~accounts~~acquires loans that have experienced deterioration of credit quality between origination and the Company’s acquisition of the loans. The amount paid for a loan reflects the Company’s determination that it is probable the Company will be unable to collect all amounts due according to the loan’s contractual terms. At acquisition, the Company reviews each loan to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that the Company will be unable to collect all amounts due according to the loan’s contractual terms. If both conditions exist, the Company determines whether each such loan is to be accounted for individually or whether such loans will be assembled into pools of loans based on common risk characteristics. The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for each acquired portfolio of loans and subsequently aggregated pools of loans. The Company determines the excess of the pool’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference) based on the Company’s proprietary acquisition models. The remaining amount, representing the excess of the loan’s cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the remaining life of the loan or pool (accretable yield).

Prior to January 1, 2005, the Company accounted for its investment in finance receivables using the interest method under the guidance of Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans.” ~~Static~~Effective January 1, 2005, the Company adopted and began to account for its investment in finance receivables using the interest method under the guidance of American Institute of Certified Public Accountants (“AICPA”)

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Statement of Position (“SOP”) 03-03, “Accounting for Loans or Certain Securities Acquired in a Transfer.” For loans acquired in fiscal years beginning prior to December 15, 2004, Practice Bulletin 6 is still effective; however, Practice Bulletin 6 was amended by SOP 03-03 as described further in this note. For loans acquired in fiscal years beginning after December 15, 2004, SOP 03-03 is effective. Under the guidance of SOP 03-03 (and the amended Practice Bulletin 6), static pools of ~~relatively homogenous~~ accounts are established. ~~Once a static pool is established, the receivable accounts in the pool~~These pools are ~~not changed.~~aggregated based on certain common risk criteria. Each static pool is recorded at cost, which includes certain direct costs of acquisition paid to third parties, and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). SOP 03-03 (and the amended Practice Bulletin 6) requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. The SOP initially freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are purchased as the basis for subsequent impairment testing. Significant increases in expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Effective for fiscal years beginning after December 15, 2004 under SOP 03-03 and the amended Practice Bulletin 6, rather than lowering the estimated IRR if the collection estimates are not received, the carrying value of a pool would be written down to maintain the then current IRR. Income on finance receivables is accrued ~~monthly~~quarterly based on each static pool’s effective ~~interest rate. This interest rate is estimated based on the timing and amount of anticipated cash flows using the Company’s proprietary collection models. Monthly~~IRR. Quarterly cash flows greater than the interest accrual will reduce the carrying value of the static pool. Likewise, ~~monthly~~ cash flows that are less than the ~~monthly~~ accrual will accrete the carrying balance. ~~Each pool~~The IRR is ~~reviewed monthly~~estimated and ~~compared to~~periodically recalculated based on the timing and amount of anticipated cash flows using the Company’s ~~models to drive complete amortization of the~~proprietary collection models. A pool can become fully amortized (zero carrying balance aton the ~~end of each pool’s life. The~~balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Additionally, the Company uses the cost recovery method ~~prescribed by Practice Bulletin 6 is used~~ when collections on a particular ~~portfolio~~pool of accounts cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the ~~portfolio. Additionally, a pool can become fully amortized (zero carrying balance~~portfolio, or until such time that the Company considers the collections to be probable and estimable and begins to recognize income based on the ~~Statement~~interest method as described above. At March 31, 2005, the Company had unamortized purchase price of ~~Financial Position) while still generating~~$2,563,884 in pools accounted for under the cost recovery method.

The Company establishes valuation allowances for all acquired loans subject to SOP 03-03 to reflect only those losses incurred after acquisition (that is, the present value of cash ~~collections. In this case, all cash collections~~flows initially expected at acquisition that are ~~recognized as revenue when received.~~

Inno longer expected to be collected). Valuation allowances are established only subsequent to acquisition of the loans. At March 31, 2005, the Company had no valuation allowance on its finance receivables. Prior to January 1, 2005, in the event that ~~anticipated~~estimated future cash collections would be inadequate to amortize the carrying balance, an impairment charge would be taken with a corresponding write-off of the receivable balance. ~~Accordingly, the Company does not maintain an allowance for credit losses.~~

~~PORTFOLIO RECOVERY ASSOCIATES, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~

The Company capitalizes certain fees paid to third parties related to the direct acquisition of a portfolio of accounts. These fees are added to the acquisition cost of the portfolio and accordingly are amortized over the life of the portfolio using the interest method. During the three and nine months ended September 30, 2004, respectively, the Company capitalized $354,751 and $688,765 of these direct acquisition fees. During the three and nine months ended September 30, 2003, respectively, the Company capitalized $192,491 and $1,005,048 of these direct acquisition fees. During the three and nine months ended September 30, 2004, respectively, the Company amortized $163,906 and $734,312 of these direct acquisition fees. During the three and nine months ended September 30, 2003, respectively, the Company amortized $286,653 and $841,362 of these direct acquisition fees. The balance of the unamortized capitalized fees at ~~September 30,~~March 31, 2005 and 2004 was $1,017,052 and ~~2003, respectively, was $1,225,998~~$1,599,357, respectively. During the quarters ended March 31, 2005 and ~~$1,830,369. During~~ 2004 the Company ~~wrote-off $530,580 related to~~capitalized $85,536 and $75,638, respectively, of these direct acquisition fees. During the ~~capitalization~~quarter ended March 31, 2005 and 2004 the Company amortized $167,000 and $278,475, respectively, of ~~fees paid to third parties for address correction and other customer data associated with the~~these direct acquisition ~~of portfolios purchased over the past 5 years.~~fees.

The agreements to purchase the aforementioned receivables ~~typically~~ include general representations and warranties from the sellers covering account holder death or bankruptcy and accounts settled or disputed prior to sale. The representation and warranty period permitting the return of these accounts from the Company to the seller is typically 90 to 180 days. Any funds received from the seller of finance receivables as a return of purchase price are referred to as buybacks. Buyback funds are simply applied against the finance receivable balance received and are not included in the Company’s cash collections from operations. In some cases, the seller will replace the returned accounts with new accounts in lieu of returning the purchase price. In that case, the old account is removed from the pool and the new account is added.

~~Gains on sale~~7

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

As of March 31, 2005 and 2004, the Company had $107,344,401 and $95,627,786, respectively, remaining of finance ~~receivables, representing the difference between the sales price and the unamortized value of the finance receivables sold, are recognized when finance receivables are sold.~~

The Company applies a financial components approach that focuses on control when accounting and reporting for transfers and servicing of financial assets and extinguishments of liabilities. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, eliminates financial assets when control has been surrendered, and eliminates liabilities when extinguished. This approach provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Importantly, these funds derived from sales are not included in our cash collections from finance receivables figure. They are reported separately under FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”

receivables. Changes in finance receivables ~~for the three~~at March 31, 2005 and ~~nine months ended September 30,~~ 2004 ~~and 2003~~ were as follows:


	Three Months			Three Months			Nine Months			Nine Months			Three Months			Three Months
	Ended			Ended			Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,			March 31,			March 31,
	2004			2003			2004			2003			2005			2004
Balance at beginning of period	$	96,270,285		$	86,688,557		$	92,568,557		$	65,526,235
Balance at beginning of year													$	105,188,906		$	92,568,557
Acquisitions of finance receivables, net of buybacks		10,821,842			11,978,443			37,626,129			50,849,497			17,735,629			14,678,341

Cash collections		(38,849,920	)		(30,219,256	)		(112,750,368	)		(86,164,004	)		(47,829,804	)		(35,526,698	)
Income recognized on finance receivables		27,069,524			21,388,674			77,867,413			59,624,690			32,249,670			23,907,586

Cash collections applied to principal		(11,780,396	)		(8,830,582	)		(34,882,955	)		(26,539,314	)		(15,580,134	)		(11,619,112	)

Balance at end of period	$	95,311,731		$	89,836,418		$	95,311,731		$	89,836,418
Balance at end of year													$	107,344,401		$	95,627,786

~~At the time of acquisition, the life of each pool is generally set at between 60 and 84 months based upon the proprietary models of the Company.~~ As of ~~September 30, 2004~~March 31, 2005 the Company ~~has $95,311,731~~had $107,344,401 in finance ~~receivables included in the Statement of Financial Position.~~receivables. Based upon current projections, cash collections applied to principal will be as follows for the twelve months in the periods ending:

7 Accretable yield represents the amount of income the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of March 31, 2005 and 2004. Changes in accretable yield at March 31, 2005 and 2004 were as follows:

During the three months ended March 31, 2005 and 2004, the Company purchased $659.9 million and $613.1 million of face value of charged-off consumer receivables. At March 31, 2005, the estimated remaining collections on the receivables purchased in the three months ended March 31, 2005 and 2004 is $29,980,012 and $27,182,118, respectively.

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

September 30, 2005 $ 31,304,683
September 30, 2006 30,567,016
September 30, 2007 22,166,778
September 30, 2008 7,618,917
September 30, 2009 2,249,059
September 30, 2010 949,739
September 30, 2011 455,539

$ 95,311,731

3. Revolving Line of Credit:

The Company maintains a $25.0 million revolving line of credit pursuant to an agreement entered into on November 28, ~~2003.~~2003 and amended on November 22, 2004. The credit facility bears interest at a spread of 2.50% over LIBOR and extends through November 28, ~~2004.~~2006. The agreement calls for:

~~restrictions on monthly borrowings are limited to 20% of Estimated Remaining Collections;~~

	•	restrictions on monthly borrowings are limited to 20% of Estimated Remaining Collections;

	•	a debt coverage ratio of a least 8.0 to 1.0 calculated on a rolling twelve-month average;

	•	a debt to tangible net worth ratio of less than 0.40 to 1.00;

	•	net income per quarter of at least $1.00, calculated on a consolidated basis, and;

	•	restrictions on change of control.

~~a debt coverage ratio of a least 8.0 to 1.0 calculated on a rolling twelve-month average;~~

~~a debt to tangible net worth ratio of less than 0.40 to 1.00;~~

~~net income per quarter of at least $1.00, calculated on a consolidated basis, and;~~

~~restrictions on change of control.~~

This facility had no amounts outstanding at ~~September 30, 2004.~~March 31, 2005. As of ~~September 30, 2004~~March 31, 2005 the Company is in compliance with all of the covenants of this agreement.

4. Long-Term Debt:

In July 2000, the Company purchased a building in Hutchinson, Kansas. The building was financed with a commercial loan for $550,000 with a variable interest rate based on LIBOR. This commercial loan is collateralized by the real estate in Kansas. Monthly principal payments on the loan are $4,583 for an amortized term of 10 years. A balloon payment of $275,000 is due July 21, 2005, which results in a five-year principal payout. The loan matures July 21, 2005.

On February 9, 2001, the Company purchased a generator for its Norfolk location. The generator was financed with a commercial loan for $107,000 with a fixed rate of 7.9%. This commercial loan is collateralized by the generator. Monthly payments on the loan are $2,170 and the loan matures on February 1, 2006.

On February 20, 2002, the Company completed the construction of a satellite parking lot at its Norfolk location. The parking lot was financed with a commercial loan for $500,000 with a fixed rate of 6.47%. The loan is collateralized by the parking lot. The loan required only interest payments during the first six months. Beginning October 1, 2002, monthly payments on the loan are $9,797 and the loan matures on September 1, 2007.

On May 1, 2003, the Company secured financing for its computer equipment purchases related to the Hampton, Virginia office opening. The computer equipment was financed with a commercial loan for $975,000 with a fixed rate of 4.25%. This loan is collateralized by computer equipment. Monthly payments are $18,096 and the loan matures on May 1, 2008.

On January 9, 2004, the Company entered into a commercial loan agreement in the amount of $750,000 to finance equipment purchases at its newly leased Norfolk facility. This loan bears interest at a fixed rate of 4.45%, matures on January 1, 2009 and is collateralized by the purchased equipment.

8 These five loans are collateralized by the related asset and are subject to the following covenants:

• net worth greater than $20,000,000, and;
• a cash flow coverage ratio of at least 1.5 to 1 calculated on a rolling twelve-month average.

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~The loans are subject to the following covenants:~~

~~net worth greater than $20,000,000, and;~~

~~a cash flow coverage ratio of at least 1.5 to 1 calculated on a rolling twelve-month average.~~

5. Property and Equipment:

Property and equipment, at cost, consist of the following as of the dates indicated:


	September 30,			December 31,			March 31,			December 31,
	2004			2003			2005			2004
Software	$	2,492,223		$	2,030,403		$	2,660,572		$	2,550,224
Computer equipment		2,884,532			2,193,386			3,178,123			2,964,333
Furniture and fixtures		1,643,560			1,283,748			1,734,902			1,729,792
Equipment		1,827,358			1,602,547			2,287,546			1,876,081
Leasehold improvements		1,256,018			801,516			1,153,996			1,146,489
Building and improvements		1,138,924			1,138,924			1,193,906			1,142,017
Land		100,515			100,515			150,922			150,922
Less accumulated depreciation		(5,309,968	)		(3,984,659	)		(6,303,232	)		(5,807,369	)


Property and equipment, net	$	6,033,162		$	5,166,380		$	6,056,735		$	5,752,489

With the acquisition of IGS on October 1, 2004, the Company purchased certain tangible and intangible assets. Intangible assets purchased included client relationships, non-compete agreements and goodwill. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company is amortizing the client relationships and non-compete agreements over seven and three years, respectively and reviews them annually for impairment. Total amortization expense was $444,858 and $0 for the three months ended March 31, 2005 and 2004, respectively. In addition, goodwill, pursuant to SFAS 142, is not amortized but rather is reviewed annually for impairment.

The Company has a stock option and restricted (nonvested) share plan. The Amended and Restated Portfolio Recovery 2002 Stock Option Plan and 2004 Restricted Stock Plan was approved by the Company’s shareholders at its Annual Meeting of Shareholders on May 12, 2004, enabling the Company to issue to its employees and directors restricted shares of stock, as well as stock options. Also, in connection with the IPO, all existing PRA warrants that were owned by certain individuals and entities were exchanged for an equal number of PRA Inc warrants. Prior to 2002, the Company accounted for stock compensation issued under the recognition and measurement provisions of APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” and related Interpretations.

Effective January 1, 2002, the Company adopted the fair value recognition provisions of FASB Statement No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” prospectively to all employee awards granted, modified, or settled after January 1, 2002. All stock-based compensation measured under the provisions of APB 25 became fully vested during 2002. All stock-based compensation expense recognized thereafter was derived from stock-based compensation based on the fair value method prescribed in SFAS 123.

Total equity-based compensation expense was $229,853 and $148,998 for the three months ended March 31, 2005 and 2004, respectively.

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.


	Three Months			Three Months
	Ended			Ended
	March 31,			March 31,
	2005			2004
Net income/Pro forma net income:
As reported	$	8,919,832		$	6,011,108
Add: Stock-based compensation expense included in reported net income, net of related tax effects		140,813			90,969
Less: Total stock based compensation expense determined under intrinsic value method for all awards, net of related tax effects		(140,813	)		(90,969	)

Pro forma net income	$	8,919,832		$	6,011,108


Earnings per share:
Basic — as reported	$	0.57		$	0.39
Basic — pro forma	$	0.57		$	0.39

Diluted — as reported	$	0.55		$	0.38
Diluted — pro forma	$	0.55		$	0.38

Stock Warrants

~~The~~ Prior to the IPO, the PRA management committee was authorized to issue warrants to partners, employees or vendors to purchase membership units. Generally, warrants granted had a term between 5 and 7 years and vested within 3 years. Warrants had been issued at or above the fair market value on the date of grant. Warrants vest and expire according to terms established at the grant date. All ~~outstanding~~ warrants ~~were issued to employees of~~became fully vested at the ~~Company and are fully vested.~~Company’s IPO in 2002. During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ no warrants were issued.

Total equity-based compensation was $220,832 and $131,904 for the three months ended September 30, 2004 and 2003, respectively and $516,028 and $313,902 for the nine months ended September 30, 2004 and 2003, respectively.

911

The Company created the 2002 Stock Option Plan (the “Plan”) on November 7, 2002. The Plan was amended in 2004 to enable the Company to issue restricted (nonvested) shares of stock to its employees and directors. The Amended Plan was approved by the Company’s shareholders at its Annual Meeting on May 12, 2004. Up to 2,000,000 shares of common stock may be issued under the Amended Plan. The Amended Plan expires November 7, 2012. All options and restricted shares issued under the Amended Plan vest ratably over 5 years. Granted options expire seven years from grant date. Expiration dates range between November 7, 2009 and January 16, 2011. Options granted to a single person cannot exceed 200,000 in a single year. As of ~~September 30, 2004,~~March 31, 2005, 895,000 options have been granted under the Amended Plan, of which ~~63,475~~77,025 have been cancelled.

The Company utilizes the Black-Scholes option pricing model to calculate the value of the stock options when granted. This model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options. In addition, changes to the subjective input assumptions can result in materially different fair market value estimates. Therefore, the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options.

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Options issue year:	2004	2003
Weighted average fair value of options granted	$2.85	$5.84
Expected volatility	13.26% - 13.55%	15.70% - 15.73%
Risk-free interest rate	3.16% - 3.37%	2.92% - 3.19%
Expected dividend yield	0.00%	0.00%
Expected life (in years)	5.00	5.00

Utilizing these assumptions, each employee stock option granted in ~~2002~~2003 was valued ~~at $2.71 per share and each director stock option granted in 2002 was valued at $3.37 per share. For stock options issued to employees in 2003, the per share values ranged~~ between $5.80 and $6.25. Each non-employee director stock option granted in 2004 iswas valued between $2.62 and $2.92.

~~Restricted Stock~~Nonvested Shares

~~Restricted stock~~ Nonvested shares are permitted to be issued as an incentive to attract new employees and, effective commensurate with the meeting of shareholders held on May 12, 2004, are permitted to be issued to directors and existing employees as well. The terms of the ~~restricted~~nonvested share awards are similar to those of the stock option awards, wherein the shares are issued at or above market values and vest ratably over 5 years. ~~Restricted stock is~~Nonvested share grants are expensed over ~~its~~their vesting period.

The following summarizes all ~~restricted~~nonvested stock transactions from December 31, 2002 through ~~September 30, 2004:~~March 31, 2005:


	Restricted			Weighted		Nonvested			Weighted
	Shares			Average		Shares			Average
	Outstanding			Price		Outstanding			Price
December 31, 2002		—		$	—		—		$	—
Granted		13,045			27.57		13,045			27.57

December 31, 2003		13,045			27.57		13,045			27.57
Granted		62,350			25.59		84,350			26.94
Vested		(2,509	)		27.56		(2,609	)		27.57
Cancelled		(1,000	)		25.66		(4,900	)		26.08

September 30, 2004		71,886		$	25.88
December 31, 2004							89,886			27.06
Vested							(1,000	)		24.40
Cancelled							(2,550	)		26.83

March 31, 2005							86,336		$	27.10

Basic earnings per share (“EPS”) are computed by dividing income available to common shareholders by weighted average common shares outstanding. Diluted EPS are computed using the same components as basic EPS with the denominator adjusted for the dilutive effect of stock warrants, stock options and restricted stock awards. The following tables provide a reconciliation between the computation of basic EPS and diluted EPS for the three ~~and nine~~ months ended ~~September 30, 2004~~March 31, 2005 and 2003:

For the three months ended September 30,
2004 2003
Weighted Average Weighted Average
Net Income Common Shares EPS Net Income Common Shares EPS
Basic EPS $ 6,974,765 15,341,801 $ 0.45 $ 5,529,193 15,148,978 $ 0.36
Dilutive effect of stock warrants, options and restricted stock awards 489,859 601,669

Diluted EPS $ 6,974,765 15,831,660 $ 0.44 $ 5,529,193 15,750,647 $ 0.35

As of ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ there were ~~75,000~~0 and ~~55,000~~75,000 antidilutive options outstanding, respectively.

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

9. Commitments and Contingencies:

Employment Agreements:

The Company has employment agreements with all of its executive officers and with several members of its senior management group, the terms of which expire on ~~March 31, 2005,~~ December 31, 2005, 2006, or 2007. Such agreements provide for base salary payments as well as ~~bonuses which are~~bonus entitlement, based on the attainment of specific ~~management~~personal and Company goals. Estimated future compensation under these agreements is approximately ~~$4,539,440.~~$3,111,268. The agreements also contain confidentiality and non-compete provisions. ~~This amount also includes agreements signed on October 1, 2004 by the management of IGS Nevada.~~

Leases:

The Company is party to various operating and capital leases with respect to its facilities and equipment. Please refer to the Company’s consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K, as ~~amended, as~~ filed with the Securities and Exchange Commission for discussion of these leases.

Litigation:

The Company is from time to time subject to routine litigation incidental to its business. The Company believes that the results of any pending legal proceedings will not have a material adverse effect on the financial condition, results of operations or liquidity of the Company.

~~PORTFOLIO RECOVERY ASSOCIATES, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~

~~9. Subsequent Event:~~

On October 1, 2004, the Company acquired the assets of IGS Nevada, Inc., a privately held company specializing in asset-location and debt resolution services. The transaction was completed at a price of $14 million, consisting of $12 million in cash and $2 million in PRA Inc common stock. The total purchase price could increase by $4 million, through contingent cash payments of $2 million each in 2005 and 2006, based upon the performance of PRA Location Services, LLC d/b/a IGS Nevada (“IGS Nevada”) during each of those two years. The business will operate under the name of PRA Location Services, LLC d/b/a IGS Nevada. IGS Nevada, Inc.’s founder and his top management team have signed long-term employment agreements and will continue to manage IGS Nevada. The Company secured a consent from its revolving line of credit holder related to this acquisition.

The common stock component of the purchase price resulted in the issuance of 69,914 shares of unregistered stock to the sole selling stockholder. The share count was determined by using a formula agreed to by both parties and contained within the asset purchase agreement. In addition, on October 1, 2004, 17,000 restricted stock shares were awarded to certain employees of IGS Nevada.

The Company obtained an independent valuation of the assets purchased. This valuation has determined that of the $14 million purchase price, $5.0 million is related to customer relationships, $1.8 million is related to non-compete agreements, $1.0 million is tangible net worth, with the remaining $6.2 million allocated to goodwill. The Company has accounted for the acquisition in accordance with FAS141, “Business Combinations” and will apply the provisions of FAS142, “Goodwill and Other Intangible Assets” to the acquired intangible assets.

10. Recent Accounting Pronouncements:

In October 2003, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-03, “Accounting for Loans or Certain Securities Acquired in a Transfer.” This SOP proposes guidance on accounting for differences between contractual and expected cash flows from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. This SOP is effective for loans acquired in fiscal years beginning afterOn December 15, 2004. The SOP would limit the revenue that may be accrued to the excess of the estimate of expected future cash flows over a portfolio’s initial cost of accounts receivable acquired. The SOP would require that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue, expense, or on the balance sheet. The SOP would freeze the internal rate of return, referred to as IRR, originally estimated when the accounts receivable are purchased for subsequent impairment testing. Rather than lower the estimated IRR if the original collection estimates are not received, the carrying value of a portfolio would be written down to maintain the original IRR. Increases in expected future cash flows would be recognized prospectively through adjustment of the IRR over a portfolio’s remaining life. The SOP provides that previously issued annual financial statements would not need to be restated. Historically, as the Company has applied the guidance of Practice Bulletin 6, the Company has moved yields both upward and downward as appropriate under that guidance. However, since the new SOP guidance does not permit yields to be lowered, it will increase the probability of impairment charges going forward.

~~PORTFOLIO RECOVERY ASSOCIATES, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~

~~In March~~16, 2004, the Financial Accounting Standards Board (“FASB”) issued ~~an Exposure Draft,~~FASB statement No. 123®, “Share-Based Payment, ~~an amendment of~~” (“FAS 123R”). FAS 123R revises FASB ~~Statements No. 123 and 95.” This proposed Statement would neither change the accounting in FASB Statement~~statement No. 123, “Accounting for Stock-Based ~~Compensation,~~Compensation” (“FAS 123”) and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. In addition to revising FAS 123, FAS 123R supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and amends FASB Statement No. 95, “Statement of Cash Flows.” ~~for~~FAS 123R applies to all stock-based compensation transactions in which ~~an enterprise exchanges~~a company acquires services by (1) issuing its stock or other equity instruments, ~~for services of parties other than employees nor change the accounting for stock ownership~~except through arrangements resulting from employee stock-ownership plans ~~which~~(ESOPs) or (2) incurring liabilities that are subject to AICPA Statement of Position 93-6, “Employer’s Accounting for Employee Stock Ownership Plans.” The Board intends to reconsider the accounting for those transactions and plan in a later phase of its project on equity-based compensation. In this proposed Statement, the Board believes that employee services received in exchange for equity instruments give rise to recognizable compensation cost as the services are used in the issuing entity’s operations. In addition, the proposed Statement would require that public companies measure the compensation cost related to employee services received in exchange for equity instruments issued based on the grant-date fair value of those instruments. The Board will also consider other items such as streamlining volatility assumptions and addressing the fair value measurement models. On October 13, 2004, the FASB delayed thecompany’s stock price. FAS 123R is effective ~~date to~~for annual periods ~~beginning~~that begin after June 15, ~~2005, rather then~~2005; however, early adoption is encouraged. The Company believes that all of its existing stock-based awards are equity instruments. The Company previously adopted FAS 123 on January 1, ~~2005 as originally proposed. In addition,~~2002 and has been expensing equity based compensation since that time. Management believes the FASB recently decided to include in the proposed statement two transition methods: one that provides for prospective treatment and one that provides for retrospective application. The FASB is expected to issue its final standard before December 31, 2004. Management will continue to assess the potential impact this statementadoption of FAS 123R will have no material impact on ~~the Company; however, the Company has adopted SFAS 123 and currently expenses all equity-based compensation in the current period.~~its financial statements.

1415

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:

This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause ~~the~~our results ~~of the Company~~ to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding overall trends, gross margin trends, operating cost trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and assumptions referred to above may include the following:

changes in the business practices of sellers of consumer receivables in terms of selling defaulted consumer receivables or outsourcing defaulted consumer receivables to third-party contingent fee collection agencies;

	•	our ability to purchase defaulted consumer receivables at appropriate prices;

	•	changes in the business practices of credit originators in terms of selling defaulted consumer receivables or outsourcing defaulted consumer receivables to third-party contingent fee collection agencies;

	•	changes in government regulations that affect our ability to collect sufficient amounts on our acquired or serviced receivables;

	•	our ability to employ and retain qualified employees, especially collection personnel;

	•	changes in the credit or capital markets, which affect our ability to borrow money or raise capital to purchase or service defaulted consumer receivables;

	•	the degree and nature of our competition;

	•	our future ability to comply with the provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder;

	•	our ability to successfully integrate IGS into our business operations;

	•	the sufficiency of our funds generated from operations, existing cash and available borrowings to finance our current operations; and

	•	the risk factors listed from time to time in our filings with the Securities and Exchange Commission.

~~changes in government regulations that affect the Company’s ability to collect sufficient amounts on its acquired or serviced receivables;~~

~~the Company’s ability to employ and retain qualified employees, especially collection personnel;~~

~~changes in the credit or capital markets, which affect the Company’s ability to borrow money or raise capital to purchase or service defaulted consumer receivables;~~

~~the Company’s ability to comply with the provisions of the Sarbanes-Oxley Act of 2002;~~

~~the Company’s ability to integrate the acquisition of IGS Nevada;~~

~~the sufficiency of the Company’s funds generated from operations, existing cash and available borrowings to finance the Company’s current operations;~~

~~the degree and nature of the Company’s competition; and~~

~~the risk factors listed from time to time in the Company’s filings with the Securities and Exchange Commission.~~

1516

Results of Operations

The following table sets forth certain operating data as a percentage of total revenue for the periods indicated:


	For the Three Months						For the Nine Months						For the Three Months
	Ended September 30,						Ended September 30,						Ended March 31,
	2004			2003			2004			2003			2005			2004
Revenues:
Income recognized on finance receivables		95.7	%		96.5	%		95.3	%		96.3	%		90.1	%		94.6	%
Commissions		4.3	%		3.5	%		4.7	%		3.7	%		9.9	%		5.4	%

Total revenue		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses:
Compensation and employee services		32.4	%		33.2	%		32.9	%		34.6	%		30.4	%		33.8	%
Outside legal and other fees and services		18.9	%		17.5	%		18.4	%		16.1	%		20.0	%		16.8	%
Communications		3.0	%		3.2	%		3.3	%		3.2	%		3.0	%		4.0	%
Rent and occupancy		1.5	%		1.5	%		1.6	%		1.4	%		1.3	%		1.7	%
Other operating expenses		2.3	%		1.8	%		2.5	%		2.2	%		2.1	%		2.7	%
Depreciation		1.7	%		1.7	%		1.7	%		1.7	%
Depreciation and amortization														2.6	%		1.8	%

Total operating expenses		59.8	%		58.9	%		60.4	%		59.2	%		59.4	%		60.8	%

Income from operations		40.2	%		41.1	%		39.6	%		40.8	%		40.6	%		39.2	%
Other income and (expense):
Interest income		0.3	%		0.0	%		0.1	%		0.0	%		0.3	%		0.0	%
Interest expense		-0.2	%		-0.4	%		-0.3	%		-0.4	%		(-0.2	%)		(-0.3	%)

Income before income taxes		40.3	%		40.7	%		39.4	%		40.4	%		40.7	%		38.9	%
Provision for income taxes		15.6	%		15.8	%		15.3	%		15.7	%		15.8	%		15.2	%

Net income		24.7	%		24.9	%		24.1	%		24.7	%		24.9	%		23.7	%

~~The Company uses~~We use the following terminology throughout ~~its~~our reports. “Cash Receipts” refers to all collections of cash, regardless of the source. “Cash Collections” refers to collections on ~~the Company’s~~our owned portfolios only, exclusive of commission income and sales of finance receivables. “Cash Sales of Finance Receivables” refers to the sales of ~~the Company’s~~our owned portfolios. “Commissions” refers to fee income generated from ~~the Company’s~~our wholly-owned contingent fee ~~subsidiary.~~and fee-for-service subsidiaries.

Three Months Ended ~~September 30, 2004~~March 31, 2005 Compared To Three Months Ended ~~September 30, 2003~~March 31, 2004

Total revenue was ~~$28.3~~$35.8 million for the three months ended ~~September 30, 2004,~~March 31, 2005, an increase of ~~$6.1~~$10.5 million or ~~27.5%~~41.5% compared to total revenue of ~~$22.2~~$25.3 million for the three months ended ~~September 30, 2003.~~March 31, 2004.

Income recognized on finance receivables was ~~$27.1~~$32.2 million for the three months ended ~~September 30, 2004,~~March 31, 2005, an increase of ~~$5.7~~$8.3 million or ~~26.6%~~34.7% compared to income recognized on finance receivables of ~~$21.4~~$23.9 million for the three months ended ~~September 30, 2003.~~March 31, 2004. The majority of the increase was due to an increase in ~~the Company’s~~our cash collections on ~~its~~our owned defaulted consumer receivables to ~~$38.8~~$47.8 million from ~~$30.2~~$35.5 million, an increase of ~~28.5%~~34.7%. ~~The Company’s~~Our amortization rate on owned portfolio for the three months ended ~~September 30, 2004~~March 31, 2005 was ~~30.3%~~32.6% while for the three months ended ~~September 30, 2003~~March 31, 2004 it was ~~29.2%~~32.7%. During the three months ended ~~September 30, 2004, the Company~~March 31, 2005, we acquired defaulted

consumer receivables portfolios with an aggregate face value amount of ~~$564.9~~$659.9 million at a cost of ~~$10.8~~$17.8 million. During the three months ended ~~September 30, 2003, the Company~~March 31, 2004, we acquired defaulted consumer receivable portfolios with an aggregate face value of ~~$323.4~~$613.1 million at a cost of ~~$11.8~~$15.0 million. ~~The Company’s~~Our relative cost basis of acquiring defaulted consumer receivable portfolios ~~decreased~~increased from ~~3.65%~~2.46% of face value for the three months ended ~~September 30, 2003~~March 31, 2004 to ~~1.91%~~2.69% of face value for the three months ended ~~September 30, 2004.~~March 31, 2005. In any period, ~~the Company acquires~~we acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectibility. ~~The Company~~We may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on ~~the Company’s~~our particular buying activity in that period. During the three months ended ~~September 30, 2004, the Company~~March 31, 2005, we bought a slightly higher concentration of ~~older, lower~~newer, higher priced portfolios which resulted in a ~~lower~~higher purchase price when compared to the three months ended ~~September 30, 2003.~~March 31, 2004. However, regardless of the average purchase price, ~~the Company intends~~we intend to target a similar internal rate of return in pricing ~~its~~our portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to estimated profitability of a period’s buying.

Commissions

Commissions were ~~$1.2~~$3.5 million for the three months ended ~~September 30, 2004,~~March 31, 2005, an increase of ~~$416,000~~$2.1 million or ~~53.1%~~150.0% compared to commissions of ~~$784,000~~$1.4 million for the three months ended ~~September 30, 2003.~~March 31, 2004. Commissions increased as a result of ~~increased liquidation rates on its~~a growing inventory ~~due to an improved client mix.~~of higher quality accounts from our Anchor contingent fee business as well as the addition of our IGS fee-for-service business.

Operating Expenses

Total operating expenses were ~~$16.9~~$21.2 million for the three months ended ~~September 30, 2004,~~March 31, 2005, an increase of ~~$3.8~~$5.8 million or ~~29.0%~~37.7% compared to total operating expenses of ~~$13.1~~$15.4 million for the three months ended ~~September 30, 2003.~~March 31, 2004. Total operating expenses, including compensation and employee services expenses, were ~~42.2%~~41.4% of cash receipts excluding sales for the three months ended ~~September 30, 2004~~March 31, 2005 compared to ~~42.1%~~41.6% for the same period in ~~2003.~~2004.

Compensation and Employee Services

Compensation and employee services expenses were ~~$9.2~~$10.9 million for the three months ended ~~September 30, 2004,~~March 31, 2005, an increase of ~~$1.8~~$2.4 million or ~~24.3%~~28.2% compared to compensation and employee services expenses of ~~$7.4~~$8.5 million for the three months ended ~~September 30, 2003.~~March 31, 2004. Compensation and employee services expenses increased as total employees grew to ~~891~~978 at ~~September 30, 2004~~March 31, 2005 from ~~747~~814 at ~~September 30, 2003.~~March 31, 2004. Compensation and employee services expenses as a percentage of cash receipts excluding sales decreased to ~~22.8%~~21.1% for the three months ended ~~September 30, 2004~~March 31, 2005 from ~~23.6%~~23.1% of cash receipts excluding sales for the same period in ~~2003~~2004 as a result of increased collector productivity.

Outside Legal and Other Fees and Services

Outside legal and other fees and services expenses were ~~$5.3~~$7.2 million for the three months ended ~~September 30, 2004,~~March 31, 2005, an increase of ~~$1.4~~$3.0 million or ~~35.9%~~71.4% compared to outside legal and other fees and services expenses of ~~$3.9~~$4.2 million for the three months ended ~~September 30, 2003.~~March 31, 2004. Approximately ~~$1.4~~$1.5 million of the increase was attributable to the increased cash collections resulting from the increased number of accounts referred to independent contingent fee attorneys. This increase is consistent with the growth ~~the Company~~we experienced in ~~its~~our portfolio of defaulted consumer receivables and a portfolio management strategy shift implemented in ~~mid 2002.~~mid-2002. This strategy resulted in ~~the Company~~us referring to the legal suit process more previously unsuccessfully liquidated accounts that have an identified means of repayment but that are nearing their legal statute of limitations, than had been referred historically. Legal cash collections represented ~~29.7%~~27.4% of total cash ~~collections~~receipts for the three months ended ~~September 30, 2004~~March 31, 2005 compared to ~~24.8%~~26.3% for the three months ended ~~September 30, 2003.~~March 31, 2004. Total legal expenses for the three months ended ~~September 30, 2004~~March 31, 2005 were ~~36.8%~~34.4% of legal cash collections compared to ~~38.9%~~34.5% for the three months ended ~~September 30, 2003.~~March 31, 2004. Legal fees and costs increased from ~~$3.0~~$3.3 million for the three months ended ~~September 30, 2003~~March 31, 2004 to ~~$4.4~~$4.8 million, or an increase of ~~46.7%~~45.5%, for the three months ended ~~September 30, 2004.~~March 31, 2005. Of the remaining $1.5 million increase, $1.0 million was from agency fees mainly incurred by our IGS subsidiary and $500,000 was from increased other fees and services.

Rent and Occupancy

Rent and occupancy expenses were ~~$435,000~~$476,000 for the three months ended ~~September 30, 2004,~~March 31, 2005, an increase of ~~$118,000~~$47,000 or ~~37.2%~~11.0% compared to rent and occupancy expenses of ~~$317,000~~$429,000 for the three months ended ~~September 30, 2003. The increase was attributable to increased leased space at the Company’s~~March 31, 2004. Our new ~~Norfolk, VA location which~~IGS facility accounted for ~~$110,000~~$24,000 of the ~~increase. The~~increase while the remaining increase was attributable to rent escalations at our Norfolk locations as well as increased utility charges ~~resulting from the increased space in Norfolk.~~generally.

Other Operating Expenses

Other operating expenses were ~~$649,000~~$753,000 for the three months ended ~~September 30, 2004,~~March 31, 2005, an increase of ~~$256,000~~$62,000 or ~~65.1%~~9.0% compared to other operating expenses of ~~$393,000~~$691,000 for the three months ended ~~September 30, 2003.~~March 31, 2004. The increase was due to changes in insurance expenses, taxes, fees and licenses, repairs and maintenance, travel expenses and miscellaneous expenses. ~~Insurance expenses increased by $149,000, taxes,~~Taxes, fees and licenses increased by ~~$140,000,~~$93,000 and insurance increased by $36,000. These were offset by a decrease in repairs and maintenance of $18,000, a decrease in travel expenses of $21,000 and a decrease in miscellaneous expenses ~~decreased by $33,000.~~of $28,000.

Depreciation and Amortization

Depreciation and amortization expenses were ~~$488,000~~$941,000 for the three months ended ~~September 30, 2004,~~March 31, 2005, an increase of ~~$105,000~~$493,000 or ~~27.4%~~110.0% compared to depreciation expenses of ~~$383,000~~$448,000 for the three months ended ~~September 30, 2003.~~March 31, 2004. The increase was attributable to the depreciation and amortization of the acquired assets of IGS and the continued capital expenditures on equipment, software and computers related to ~~the Company’s~~our growth and systems upgrades. The amortization of the IGS intangible assets accounted for $445,000 of the increase while the remaining increase of $48,000 resulted from continued capital expenditures on equipment, software and computers.

Interest Income

Interest income was ~~$77,000~~$96,000 for the three months ended ~~September 30, 2004,~~March 31, 2005, an increase of ~~$76,000~~$92,000 compared to interest income of ~~$1,000~~$4,000 for the three months ended ~~September 30, 2003.~~March 31, 2004. This increase is the result of ~~an increase in~~ the ~~average invested amount~~investment in auction rate certificates ~~from $0 for~~and tax exempt money market accounts during the three months ended ~~September 30, 2003 to $21.0 million for the three months ended September 30, 2004.~~March 31, 2005.

Interest Expense

Interest expense was $64,000 for the three months ended March 31, 2005, a decrease of $5,000 or 7.3% compared to interest expense of $69,000 for the three months ended ~~September 30, 2004, a decrease of $15,000 or 17.9% compared to interest expense of $84,000 for the three months ended September 30, 2003.~~March 31, 2004. The decrease is due to a lower unused line fee under the new revolving credit arrangement.

~~Nine Months Ended September 30, 2004 Compared To Nine Months Ended September 30, 2003~~

~~Revenue~~

Total revenue was $81.7 million for the nine months ended September 30, 2004, an increase of $19.8 million or 32.0% compared to total revenue of $61.9 million for the nine months ended September 30, 2003.

~~Income Recognized on Finance Receivables~~

Income recognized on finance receivables was $77.9 million for the nine months ended September 30, 2004, an increase of $18.3 million or 30.7% compared to income recognized on finance receivables of $59.6 million for the nine months ended September 30, 2003. The majority of the increase was due to an increase in the Company’s cash collections on its owned defaulted consumer receivables to $112.8 million from $86.2 million, an increase of 30.9%. The Company’s amortization rate on owned portfolio for the nine months ended September 30, 2004 was 30.9% while for the nine months ended September 30, 2003 it was 30.8%. During the nine months ended September 30, 2004, the Company acquired defaulted consumer receivables portfolios with an aggregate face value amount of $2.67 billion at a cost of $38.7 million. During the nine months ended September 30, 2003, the Company acquired defaulted consumer receivable portfolios with an aggregate face value of $1.85 billion at a cost of $50.3 million.

The Company’s relative cost basis of acquiring defaulted consumer receivable portfolios decreased from 2.71% of face value for the nine months ended September 30, 2003 to 1.45% of face value for the nine months ended September 30, 2004. In any period, the Company acquires defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectibility. The Company may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on the Company’s particular buying activity in that period. During the nine months ended September 30, 2004, the Company bought a higher concentration of older, lower priced portfolios which resulted in a lower purchase price when compared to the nine months ended September 30, 2003. However, regardless of the average purchase price, the Company intends to target a similar internal rate of return in pricing its portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to estimated profitability of a period’s buying.

~~Commissions~~

Commissions were $3.8 million for the nine months ended September 30, 2004, an increase of $1.5 million or 65.2% compared to commissions of $2.3 million for the nine months ended September 30, 2003. Commissions increased as a result of a growing inventory of accounts.

~~Operating Expenses~~

Total operating expenses were $49.3 million for the nine months ended September 30, 2004, an increase of $12.6 million or 34.3% compared to total operating expenses of $36.7 million for the nine months ended September 30, 2003. Total operating expenses, including compensation and employee services expenses, were 42.3% of cash receipts excluding sales for the nine months ended September 30, 2004 compared to 41.5% for the same period in 2003.

~~Compensation and Employee Services~~

Compensation and employee services expenses were $26.9 million for the nine months ended September 30, 2004, an increase of $5.5 million or 25.7% compared to compensation and employee services expenses of $21.4 million for the nine months ended September 30, 2003. Compensation and employee services expenses increased as total employees grew to 891 at September 30, 2004 from 747 at September 30, 2003. Compensation and employee services expenses as a percentage of cash receipts excluding sales decreased to 23.0% for the nine months ended September 30, 2004 from 24.2% of cash receipts excluding sales for the same period in 2003.

~~Outside Legal and Other Fees and Services~~

Outside legal and other fees and services expenses were $15.0 million for the nine months ended September 30, 2004, an increase of $5.0 million or 50.0% compared to outside legal and other fees and services expenses of $10.0 million for the nine months ended September 30, 2003. Approximately $3.9 million of the increase was attributable to the increased cash collections resulting from the increased number of accounts referred to independent contingent fee attorneys. This increase is consistent with the growth the Company experienced in its portfolio of defaulted consumer receivables and a portfolio management strategy shift implemented in mid-2002. This strategy resulted in the Company referring to the legal suit process previously unsuccessfully liquidated accounts that have an identified means of repayment but that are nearing their legal statute of limitations. Legal cash collections represented 28.3% of total cash collections for the nine months ended September 30, 2004 compared to 24.7% for the nine months ended September 30, 2003. Total legal expenses for the nine months ended September 30, 2004 were 34.8% of legal cash collections compared to 35.7% for the nine months ended September 30, 2003. Legal fees and costs increased from $7.6 million for the nine months ended September 30, 2003 to $11.5 million, or an increase of 51.3%, for the nine months ended September 30, 2004. In addition, $531,000 was expensed during the nine months ended September 30, 2004 related to the capitalization of fees paid to third parties for address correction and other customer data associated with the acquisition of portfolios purchased over the past 5 years. As a result of a review of the company’s accounting, the company determined these capitalized acquisition fees should be expensed.

~~Communications~~

Communications expenses were $2.7 million for the nine months ended September 30, 2004, an increase of $700,000 or 35.0% compared to communications expenses of $2.0 million for the nine months ended September 30, 2003. The increase was attributable to growth in mailings and higher telephone expenses incurred to collect on a greater number of defaulted consumer receivables owned and serviced. Mailings were responsible for 83.1% of this increase, while the remaining 16.9% was attributable to higher telephone expenses.

~~Rent and Occupancy~~

Rent and occupancy expenses were $1.3 million for the nine months ended September 30, 2004, an increase of $430,000 or 49.4% compared to rent and occupancy expenses of $870,000 for the nine months ended September 30, 2003. The increase was attributable to increased leased space due to the opening of a call center in Hampton, Virginia in March 2003 and at the Company’s new Norfolk, VA location which opened in January 2004. The new Hampton call center accounted for $59,000 of the increase and the new Norfolk location accounted for $329,000 of the increase. The remaining increase was attributable to increased utility charges resulting from the increased space in Norfolk and Hampton.

~~Other Operating Expenses~~

Other operating expenses were $2.0 million for the nine months ended September 30, 2004, an increase of $700,000 or 53.8% compared to other operating expenses of $1.3 million for the nine months ended September 30, 2003. The increase was due to changes in taxes, fees and licenses, repairs and maintenance, insurance and miscellaneous expenses. Taxes, fees and licenses increased by $160,000, repairs and maintenance expenses increased by $79,000, insurance expenses increased by $405,000 and miscellaneous expenses increased by $56,000.

~~Depreciation~~

Depreciation expenses were $1.4 million for the nine months ended September 30, 2004, an increase of $300,000 or 27.3% compared to depreciation expenses of $1.1 million for the nine months ended September 30, 2003. The increase was attributable to continued capital expenditures on equipment, software and computers related to the Company’s growth and systems upgrades.

~~Interest Income~~

Interest income was $106,000 for the nine months ended September 30, 2004, an increase of $77,000 compared to interest income of $29,000 for the nine months ended September 30, 2003. These amounts are the result of investing in tax-exempt auction rate certificates in 2004 and 2003.

~~Interest Expense~~

Interest expense was $206,000 for the nine months ended September 30, 2004, a decrease of $37,000 or 15.2% compared to interest expense of $243,000 for the nine months ended September 30, 2003. The decrease is due to a lower unused line fee under the new revolving credit arrangement.

Supplemental Performance Data

Owned Portfolio Performance:

The following table shows ~~the Company’s~~our portfolio buying activity by year, setting forth, among other things, the purchase price, actual cash collections and estimated remaining cash collections as of ~~September 30, 2004.~~March 31, 2005.

($ in thousands)


					Estimated		Total		Total Estimated					Actual Cash								Total Estimated
			Actual Cash Collections		Remaining		Estimated		Collections to					Collections		Estimated				Total Estimated		Collections to
Purchase Period	Purchase Price⁽¹⁾		Including Cash Sales		Collections⁽²⁾		Collections⁽³⁾		Purchase Price⁽⁴⁾
Purchase												Purchase		Including Cash		Remaining		Total Estimated		Collections to		Purchase Price
Period												Price⁽¹⁾		Sales		Collections⁽²⁾		Collections⁽³⁾		Purchase Price⁽⁴⁾		Adjusted⁽⁵⁾

1996	$	3,080	$	9,192	$	118	$	9,309		302	%	$	3,080	$	9,310	$	85	$	9,395	305	%	305	%
1997	$	7,685	$	22,198	$	311	$	22,509		293	%	$	7,685	$	22,638	$	382	$	23,020	300	%	300	%
1998	$	11,089	$	30,684	$	746	$	31,430		283	%	$	11,089	$	31,615	$	802	$	32,418	292	%	292	%
1999	$	18,899	$	52,273	$	3,796	$	56,069		297	%	$	18,898	$	54,849	$	3,462	$	58,311	309	%	309	%
2000	$	25,015	$	73,778	$	11,536	$	85,315		341	%	$	25,015	$	80,229	$	10,793	$	91,022	364	%	364	%
2001	$	33,473	$	95,588	$	28,521	$	124,109		371	%	$	33,471	$	108,458	$	25,372	$	133,830	400	%	400	%
2002	$	42,284	$	78,399	$	57,230	$	135,629		321	%	$	42,281	$	96,064	$	47,145	$	143,209	339	%	339	%
2003	$	61,529	$	61,574	$	98,708	$	160,282		261	%	$	61,494	$	87,968	$	86,053	$	174,021	283	%	283	%
2004	$	39,206	$	10,289	$	85,770	$	96,059		245	%	$	61,311	$	30,454	$	109,781	$	140,236	229	%	240	%
2005 YTD												$	17,822	$	873	$	29,980	$	30,853	173	%	229	%


(2)		Estimated remaining collections refers to the sum of all future projected cash collections on our owned portfolios. ~~This estimate is derived from the Company’s level yield accounting model.~~


(3)		Total estimated collections refers to the actual cash collections, including cash sales, plus estimated remaining collections.


(4)		Total estimated collections to purchase price refers to the total estimated collections divided by the purchase price.

(5)		Total estimated collections to purchase price adjusted refers to the total estimated collections divided by the purchase price after removing the impact of purchased bankrupt accounts as well as other purchased accounts that had established some level of payment stream after charge-off (we refer to these as “paying” or “semi-performing” accounts).

When the Company acquires a portfolio of defaulted accounts, it generally does so with a forecast of future total estimated collections to purchase price paid of no more than 2.6 times. Only after the portfolio has established probable and estimable performance in excess of that projection will estimated remaining collections be increased. If actual cash collections are less than the original forecast, the Company moves aggressively to lower estimated remaining collections to appropriate levels.

The following graph shows the ~~Company’s~~ purchase price ~~in its~~of our owned portfolios by year beginning in 1996 and includes the year to date acquisition amount ~~as of September 30,~~for the quarters ended March 31, 2005 and 2004. ~~This~~The purchase price number represents the cash paid to the seller to acquire defaulted consumer receivables, plus certain capitalized costs, less the purchase price refunded by the seller due to the return of non-compliant accounts.

(BAR CHART)

~~The Company utilizes~~We utilize a long-term approach to collecting ~~its~~our owned pools of receivables. This approach has historically caused ~~the Company~~us to realize significant cash collections and revenues from purchased pools of finance receivables years after they are originally acquired. As a result, ~~the Company has~~we have in the past been able to reduce ~~its~~our level of current period acquisitions without a corresponding negative current period impact on cash collections and revenue.

The following table, which excludes any proceeds from cash sales of finance receivables, demonstrates ~~the Company’s~~our ability to realize significant multi-year cash collection streams on ~~its~~our owned ~~pools as of September 30, 2004:~~pools:

~~($ in thousands)~~

Cash Collections By Year, By Year of Purchase

($ in thousands)



Purchase	Purchase										Cash Collection Period												Purchase		Cash Collection Period
Period	Price		1996		1997		1998		1999		2000		2001		2002		2003		2004		Total		Price		1996		1997		1998		1999		2000		2001		2002		2003		2004		2005 YTD		Total

1996	$	3,080	$	548	$	2,484	$	1,890	$	1,348	$	1,025	$	730	$	496	$	398	$	212	$	9,131	$	3,080	$	548	$	2,484	$	1,890	$	1,348	$	1,025	$	730	$	496	$	398	$	285	$	45	$	9,249
1997		7,685		—		2,507		5,215		4,069		3,347		2,630		1,829		1,324		799	$	21,720		7,685		—		2,507		5,215		4,069		3,347		2,630		1,829		1,324		1,022		216	$	22,159
1998		11,089		—		—		3,776		6,807		6,398		5,152		3,948		2,797		1,750	$	30,628		11,089		—		—		3,776		6,807		6,398		5,152		3,948		2,797		2,200		483	$	31,561
1999		18,899		—		—		—		5,138		13,069		12,090		9,598		7,336		4,350	$	51,581		18,898		—		—		—		5,138		13,069		12,090		9,598		7,336		5,615		1,310	$	54,156
2000		25,015		—		—		—		—		6,894		19,498		19,478		16,628		10,814	$	73,312		25,015		—		—		—		—		6,894		19,498		19,478		16,628		14,098		3,171	$	79,767
2001		33,473		—		—		—		—		—		13,048		28,831		28,003		20,215	$	90,097		33,471		—		—		—		—		—		13,048		28,831		28,003		26,717		6,368	$	102,967
2002		42,284		—		—		—		—		—		—		15,073		36,258		27,057	$	78,388		42,281		—		—		—		—		—		—		15,073		36,258		35,742		8,980	$	96,053
2003		61,529		—		—		—		—		—		—		—		24,308		37,266	$	61,574		61,494		—		—		—		—		—		—		—		24,308		49,706		13,954	$	87,968
2004		39,206		—		—		—		—		—		—		—		—		10,289	$	10,289		61,311		—		—		—		—		—		—		—		—		18,019		12,430	$	30,449
2005 YTD																								17,822		—		—		—		—		—		—		—		—		—		873	$	873

Total	$	242,260	$	548	$	4,991	$	10,881	$	17,362	$	30,733	$	53,148	$	79,253	$	117,052	$	112,752	$	426,720	$	282,146	$	548	$	4,991	$	10,881	$	17,362	$	30,733	$	53,148	$	79,253	$	117,052	$	153,404	$	47,830	$	515,202

¹ ~~Calculated based on actual employees (collectors) with one year of service or more.~~

¹ ~~Cash collection numbers include only accounts assigned to collectors. Significant cash collections do occur on “unassigned” accounts.~~

² ~~Calculated using average YTD monthly cash collections of all collectors with one year or more of tenure.~~

Cash collections have substantially exceeded revenue in each quarter since ~~the Company’s~~our formation. The following chart illustrates the consistent excess of ~~the Company’s~~our cash collections on ~~its~~our owned portfolios over the income recognized on finance receivables on a quarterly basis. The difference between cash collections and income recognized is referred to as payments applied to principal. It is also referred to as amortization. This amortization is the portion of cash collections that is used to recover the cost of the portfolio investment represented on the ~~Statement of Financial Position.~~balance sheet.

(LINE GRAPH)

(1)

Includes cash collections on finance receivables only. Excludes commission fees and cash proceeds from sales of defaulted consumer receivables.

Seasonality

~~The Company depends~~We depend on the ability to collect on ~~its~~our owned and serviced defaulted consumer receivables. Collections tend to be higher in the first and second quarters of the year and lower in the third and fourth quarters of the year, due to consumer payment patterns in connection with seasonal employment trends, income tax refunds, and holiday spending habits. Due to ~~the Company’s~~our historical quarterly increases in cash collections, ~~its~~our growth has partially masked the impact of this seasonality.

(BAR CHART)

(1)

Includes cash collections on finance receivables only. Excludes commission fees and cash proceeds from sales of defaulted consumer receivables.

2523

The following tables categorize ~~the Company’s~~our owned portfolios as of ~~September 30, 2004~~March 31, 2005 into the major asset types and account types represented, respectively:

As shown in the following chart, as of March 31, 2005 a majority of our portfolios are secondary and tertiary accounts but we purchase or service accounts at any point in the delinquency cycle.


						Life to Date Purchased Face
						Value of Defaulted
Account Type	No. of Accounts		%			Consumer Receivables⁽¹⁾		%
Fresh		178,111		2.8	%	$	574,045,987		4.9	%
Primary		906,154		14.1	%		2,313,600,523		19.6	%
Secondary		1,687,658		26.2	%		3,162,867,494		26.8	%
Tertiary		2,822,623		43.9	%		3,616,717,758		30.7	%
Other		834,823		13.0	%		2,115,670,659		18.0	%

Total:		6,429,369		100.0	%	$	11,782,902,421		100.0	%

(1)

The Life to Date Purchased Face Value of Defaulted Consumer Receivables represents the original face amount purchased from sellers and has not been decremented by any adjustments including payments and buybacks.

As shown in the following chart, as of September 30, 2004 a majority of the Company’s portfolios are secondary and tertiary accounts but it purchases or services accounts at any point in the delinquency cycle.

Life to Date Purchased Face
Value of Defaulted Consumer Finance Receivables, net as of
Account Type
No. of Accounts
%
Receivables⁽¹⁾
%
September 30, 2004
%
Fresh 173,679 3.0 % $ 566,347,968 5.4 % $ 6,040,708 6.3 %
Primary 830,638 14.3 % 2,229,106,782 21.3 % 34,101,105 35.8 %
Secondary 1,606,164 27.6 % 3,113,649,710 29.8 % 40,058,288 42.0 %
Tertiary 2,637,205 45.3 % 2,887,338,520 27.6 % 11,395,904 12.0 %
Other 574,667 9.8 % 1,648,346,090 15.9 % 3,715,726 3.9 %

Total:
5,822,353 100.0 % $ 10,444,789,070 100.0 % $ 95,311,731 100.0 %

~~(1)~~ The Life to Date Purchased Face Value of Defaulted Consumer Receivables represents the original face amount purchased from sellers and has not been decremented by any adjustments including payments and buybacks.

~~The Company~~We also ~~reviews~~review the geographic distribution of accounts within a portfolio because ~~it has~~we have found that certain states have more debtor-friendly laws than others and, therefore, are less desirable from a collectibility perspective. In addition, economic factors and bankruptcy trends vary regionally and are factored into ~~the Company’s~~our maximum purchase price equation.

~~As the~~The following chart ~~illustrates, as of September 30, 2004 the Company’s~~sets forth our overall life to date portfolio of defaulted consumer receivables ~~is generally balanced geographically.~~geographically as of March 31, 2005:


						Life to Date Purchased Face										Life to Date Purchased Face
	No. of					Value of Defaulted					No. of					Value of Defaulted
Geographic Distribution	Accounts		%			Consumer Receivables⁽¹⁾		%			Accounts		%			Consumer Receivables⁽¹⁾		%

Texas		1,524,259		26	%	$	1,538,010,796		15	%		1,659,093		26	%	$	1,780,298,606		15	%
California		519,714		9	%		1,286,405,838		12	%		555,726		9	%		1,366,158,323		12	%
Florida		359,005		6	%		985,298,231		9	%		408,209		6	%		1,168,070,321		10	%
New York		261,842		4	%		761,634,905		7	%		287,800		4	%		824,804,361		7	%
Pennsylvania		146,167		3	%		367,434,669		4	%		162,752		3	%		417,981,310		4	%
North Carolina												163,051		3	%		404,726,613		3	%
Illinois		200,882		3	%		328,771,944		3	%		212,735		3	%		362,810,990		3	%
North Carolina		137,595		2	%		324,791,308		3	%
New Jersey												116,306		2	%		348,367,587		3	%
Ohio		165,803		3	%		295,622,870		3	%		181,177		3	%		345,227,512		3	%
New Jersey		101,129		2	%		294,630,896		3	%
Georgia		111,898		2	%		263,374,315		3	%		128,577		2	%		310,046,957		3	%
Massachusetts		113,927		2	%		262,136,068		3	%		124,775		2	%		288,080,359		2	%
Michigan		156,172		3	%		244,619,443		2	%		168,443		3	%		276,238,664		2	%
South Carolina		96,292		2	%		218,971,939		2	%		108,866		2	%		248,647,571		2	%
Missouri		238,379		4	%		208,784,468		2	%		245,702		4	%		229,236,356		2	%
Tennessee												92,877		1	%		205,960,798		2	%
Maryland		76,113		1	%		183,329,417		2	%		87,009		1	%		203,824,575		2	%
Tennessee		82,918		1	%		182,477,641		2	%
Other		1,530,258		27	%		2,698,494,322		25	%(2)		1,726,271		26	%		3,002,421,518		25	%


Total:		5,822,353		100	%	$	10,444,789,070		100	%		6,429,369		100	%	$	11,782,902,421		100	%

Cash generated from operations is dependent upon ~~the Company’s~~our ability to collect on ~~its~~our defaulted consumer receivables. Many factors, including the economy and ~~the Company’s~~our ability to hire and retain qualified collectors and managers, are essential to ~~its~~our ability to generate cash flows. Fluctuations in these factors that cause a negative impact on ~~the Company’s~~our business could have a material impact on ~~its~~our expected future cash flows.

~~The Company’s~~Our operating activities provided cash of ~~$36.1~~$14.9 million and ~~$22.6~~$8.0 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ respectively. In these periods, cash from operations was generated primarily from net income earned through cash collections and commissions received for the period which increased from ~~$15.3~~$6.0 million for the ~~nine~~three months ended ~~September 30, 2003~~March 31, 2004 to ~~$19.7~~$8.9 million for the ~~nine~~three months ended September 30, 2004. The change in tax related accounts accounted for $12.7 million and $6.9 million of the increase in operating cash flow for the nine months ended September 30, 2004 and 2003, respectively.March 31, 2005. The remaining increase was due to changes in other accounts related to ~~the~~our operating ~~activities of the Company.~~activities.

~~The Company’s~~Our investing activities provided cash of $21.0 million and used cash of ~~$4.7 million and $26.4~~$3.9 million during the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ respectively. Cash used in investing activities is primarily driven by acquisitions of defaulted consumer receivables, net of cash collections applied to principal on finance receivables. Cash provided by investing activities is primarily driven by the sale of auction rate certificates.

~~The Company’s~~Our financing activities provided cash of ~~$481,000~~$736,000 and ~~$749,000~~$671,000 during the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ respectively. Cash used in financing activities is primarily driven by payments on long term debt and capital lease obligations. Cash is provided by proceeds from debt financing and stock option exercises.

Cash paid for interest expenses was ~~$206,000~~$64,000 and ~~$241,000~~$69,000 for the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ respectively. The interest expenses were paid for capital lease obligations and other long-term debt.

~~The Company maintains~~We maintain a $25.0 million revolving line of credit with RBC Centura Bank (“RBC”) pursuant to an agreement entered into on November 28, ~~2003.~~2003 and amended on November 22, 2004. The credit facility bears interest at a spread of 2.50% over LIBOR and extends through November 28, ~~2004.~~2006. The agreement provides for:

~~restrictions on monthly borrowings are limited to 20% of Estimated Remaining Collections;~~

~~a debt coverage ratio of at least 8.0 to 1.0 calculated on a rolling twelve-month average;~~

~~a debt to tangible net worth ratio of less than 0.40 to 1.00;~~

~~net income per quarter of at least $1.00, calculated on a consolidated basis; and~~

~~restrictions on change of control.~~

	§	restrictions on monthly borrowings are limited to 20% of Estimated Remaining Collections;

	§	a debt coverage ratio of at least 8.0 to 1.0 calculated on a rolling twelve-month average;

	§	a debt to tangible net worth ratio of less than 0.40 to 1.00;

	§	net income per quarter of at least $1.00, calculated on a consolidated basis; and

	§	restrictions on change of control.

This facility had no amounts outstanding at ~~September 30, 2004.~~March 31, 2005.

As of ~~September 30, 2004~~March 31, 2005 there are five loans outstanding. On July 20, 2000, ~~PRA Holding I,~~one of our subsidiaries entered into a credit facility for a $550,000 loan, for the purpose of purchasing a building and land in Hutchinson, Kansas. The loan bears interest at a variable rate based on LIBOR and consists of monthly principal payments for 60 months and a final installment of unpaid principal and accrued interest payable on July 21, 2005. On February 9, 2001, ~~the Company~~we entered into a commercial loan agreement in the amount of $107,000 in order to purchase equipment for ~~its~~our Norfolk, Virginia location. This loan bears interest at a fixed rate of 7.9% and matures on February 1, 2006. On February 20, 2002, ~~PRA Holding I~~one of our subsidiaries entered into an additional arrangement for a $500,000 commercial loan in order to finance construction of a parking lot at ~~the Company’s~~our Norfolk, Virginia location. This loan bears interest at a fixed rate of 6.47% and matures on September 1, 2007. On May 1, 2003, ~~the Company~~we entered into a commercial loan agreement in the amount of $975,000 to finance equipment purchases for ~~its~~our Hampton, Virginia location. This loan bears interest at a fixed rate of 4.25% and matures on May 1, 2008. On January 9, 2004, ~~the Company~~we entered into a commercial loan agreement in the amount of $750,000 to finance equipment purchases at ~~its~~our newly leased Norfolk facility. This loan bears interest at a fixed rate of 4.45% and matures on January 1, 2009. The loans are collateralized by the related asset and require ~~the Company~~us to maintain net worth greater than ~~$20,000,000~~$20 million and a cash flow coverage ratio of at least 1.5 to 1.0 calculated on a rolling twelve-month average.

~~(1) – Of this amount, $4,000,000 represents the potential payout the Company will~~

~~The Company does~~We do not have any off balance sheet arrangements as defined by Regulation S-K 303(a)(4) promulgated under the Securities Exchange Act of 1934.

In October 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 03-03, “Accounting for Loans or Certain Securities Acquired in a Transfer.” This SOP proposes guidance on accounting for differences between contractual and expected cash flows from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. Accordingly, we adopted SOP 03-03 on January 1, 2005. The SOP ~~would limit~~limits the revenue that may be accrued to the excess of the estimate of expected future cash flows over a portfolio’s initial cost of accounts receivable acquired. The SOP ~~would require~~requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. The SOP ~~would freeze~~freezes the internal rate of return, referred to as IRR, originally estimated when the accounts receivable are purchased for subsequent impairment testing. Rather than lower the estimated IRR if the original collection estimates are not received, the carrying value of a portfolio ~~would be~~ is

in the future.

In March 2004, the Financial Accounting Standards Board (“FASB”) issued an Exposure Draft, “Share-Based Payment, an amendment of FASB Statements No. 123 and 95.” This proposed Statement would neither change the accounting in FASB Statement No. 123, “Accounting for Stock-Based Compensation,” for transactions in which an enterprise exchanges its equity instruments for services of parties other than employees nor change the accounting for stock ownership plans, which are subject to AICPA Statement of Position 93-6, “Employer’s Accounting for Employee Stock Ownership Plans.” The Board intends to reconsider the accounting for those transactions and plan in a later phase of its project on equity-based compensation. In this proposed Statement, the Board believes that employee services received in exchange for equity instruments give rise to recognizable compensation cost as the services are used in the issuing entity’s operations. In addition, the proposed Statement would require that public companies measure the compensation cost related to employee services received in exchange for equity instruments issued based on the grant-date fair value of those instruments. The Board will also consider other items such as streamlining volatility assumptions and addressing the fair value measurement models. On ~~October 13, 2004,~~April 14, 2005, the FASB delayed the effective date tofor annual periods beginning after June 15, 2005, rather ~~then~~than January 1, 2005 as originally proposed. In addition, the FASB recently decided to include in the proposed statement two transition methods: one that provides for prospective treatment and one that provides for retrospective application. The FASB is expected to issue its final standard before December 31, 2004. Management will continue to assess the potential impact this statement will have ~~on the Company;~~us; however, ~~the Company has~~we have adopted SFAS 123 and currently ~~expenses~~expense all equity-based compensation in the current period.

Critical Accounting ~~Policy~~Policies

The ~~Company utilizes~~preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and our discussion and analysis of our financial condition and results of operations require our management to make judgments, assumptions, and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.

Management believes our critical accounting policies and estimates are those related to revenue recognition, valuation of acquired intangibles and goodwill and income taxes. Management believes these policies to be critical because they are both important to the portrayal of our financial condition and results, and they require management to make judgments and estimates about matters that are inherently uncertain. Our senior management has reviewed these critical accounting policies and related disclosures with the Audit Committee of our Board of Directors.

Revenue Recognition

We acquire loans that have experienced deterioration of credit quality between origination and our acquisition of the loans. The amount paid for a loan reflects our determination that it is probable we will be unable to collect all amounts due according to the loan’s contractual terms. At acquisition, we review each loan to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that we will be unable to collect all amounts due according to the loan’s contractual terms. If both conditions exist, we determine whether each such loan is to be accounted for individually or whether such loans will be assembled into pools of loans based on common risk characteristics. We consider expected prepayments and estimate the amount and timing of undiscounted expected principal, interest and other cash flows for each acquired portfolio of loans and subsequently aggregated pools of loans. We determine the excess of the pool’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference) based on our proprietary acquisition models. The remaining amount, representing the

excess of the loan’s cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the remaining life of the loan or pool (accretable yield).

Prior to January 1, 2005, we accounted for our investment in finance receivables using the interest method under the guidance ~~provided by~~of Practice Bulletin 6, “Amortization of Discounts on Certain Acquired ~~Loans,~~Loans.” Effective January 1, 2005, we adopted and began to ~~determine income recognized~~account for our investment in finance receivables using the interest method under the guidance of American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 03-03, “Accounting for Loans or Certain Securities Acquired in a Transfer.” For loans acquired in fiscal years beginning prior to December 15, 2004, Practice Bulletin 6 is still effective; however, Practice Bulletin 6 was amended by SOP 03-03 as described further in this note. For loans acquired in fiscal years beginning after December 15, 2004, SOP 03-03 is effective. Under the guidance of SOP 03-03 (and the amended Practice Bulletin 6), static pools of accounts are established. These pools are aggregated based on ~~finance receivables. Under this method, each~~certain common risk criteria. Each static pool is recorded at cost, which includes certain direct costs of ~~receivables it acquires~~acquisition paid to third parties, and is ~~statistically modeled to determine its projected cash flows. A yield is then established which, when applied to the outstanding balance of the receivables, results in~~accounted for as a single unit for the recognition of income, atprincipal payments and loss provision. Once a ~~constant yield relative~~static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). SOP 03-03 (and the amended Practice Bulletin 6) requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. The SOP initially freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are purchased as the basis for subsequent impairment testing. Significant increases in expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Effective for fiscal years beginning after December 15, 2004 under SOP 03-03 and the amended Practice Bulletin 6, rather than lowering the estimated IRR if the collection estimates are not received, the carrying value of a pool would be written down to maintain the then current IRR. Income on finance receivables is accrued quarterly based on each static pool’s effective IRR. Quarterly cash flows greater than the interest accrual will reduce the carrying value of the static pool. Likewise, cash flows that are less than the accrual will accrete the carrying balance. The IRR is estimated and periodically recalculated based on the timing and amount of anticipated cash flows using our proprietary collection models. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Additionally, we use the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized until we have fully collected the cost of the portfolio, or until such time that we consider the collections to be probable and estimable and begin to recognize income based on the interest method as described above.

We establish valuation allowances for all acquired loans subject to SOP 03-03 to reflect only those losses incurred after acquisition (that is, the present value of cash flows initially expected at acquisition that are no longer expected to be collected). Valuation allowances are established only subsequent to acquisition of the loans. At March 31, 2005, we had no valuation allowance on our finance receivables. Prior to January 1, 2005, in the ~~pool.~~event that estimated future cash collections would be inadequate to amortize the carrying balance, an impairment charge would be taken with a corresponding write-off of the receivable balance.

We utilize the provisions of Emerging Issues Task Force 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” (“EITF 99-19”) to commission revenue from our contingent fee and skip-tracing subsidiaries. EITF 99-19 requires an analysis to be completed to determine if certain revenues should be reported gross or reported net of their related operating expense. This analysis includes an assessment of who retains inventory/credit risk, who controls vendor selection, who establishes pricing and who remains the primary obligor on the transaction. Each ~~pool~~of these factors was considered to determine the correct method of recognizing revenue from our subsidiaries.

For our contingent fee subsidiary, revenue is ~~analyzed monthly to assess~~recognized at the ~~actual performance to that expected~~time customer (debtor) funds are collected. The portfolios are owned by the ~~model.~~clients and the collection effort is outsourced to our subsidiary under a commission fee arrangement. The clients retain control and ownership of the accounts we service. These revenues are reported on a net basis and are included in the line item “Commissions.”

Our skip tracing subsidiary utilizes gross reporting under this EITF. We generate revenue by working an account and successfully locating a customer for our client. An “investigative fees” is received for these services. In addition, we incur “agent expenses” where we hire a third-party collector to effectuate repossession. In many cases we have an arrangement with our client which allows us to bill the client for these fees. We have determined these fees to be gross revenue based on the criteria in EITF 99-19 and they are recorded as such in the line item “Commissions,” primarily because we are primarily liable to the third party collector. There is a corresponding expense in “Outside Legal and Other Fees and Services” for these pass-through items.

We account for our gain on cash sales of finance receivables under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Gains on sale of finance receivables, representing the difference between the sales price and the unamortized value of the finance receivables sold, are recognized when finance receivables are sold.

We apply a financial components approach that focuses on control when accounting and reporting for transfers and servicing of financial assets and extinguishments of liabilities. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, eliminates financial assets when control has been surrendered, and eliminates liabilities when extinguished. This approach provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.

Valuation of Acquired Intangibles and Goodwill

In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” we are required to perform a review of goodwill for impairment annually or earlier if indicators of potential impairment exist. The review of goodwill for potential impairment is highly subjective and requires that: (1) goodwill is allocated to various reporting units of our business to which it relates; (2) we estimate the fair value of those reporting units to which the goodwill relates; and (3) we determine the book value of those reporting units. If the estimated fair value of reporting units with allocated goodwill is determined to be less than their book value, we are required to estimate the fair value of all identifiable assets and liabilities of those reporting units in a manner similar to a purchase price allocation for an acquired business. This requires independent valuation of certain unrecognized assets. Once this process is complete, the amount of goodwill impairment, if any, can be determined.

We believe as of March 31, 2005 there was no impairment of goodwill. However, changes in various circumstances including changes in our market capitalization, changes in our forecasts, and changes in our internal business structure could cause one of our reporting units to be valued differently thereby causing an impairment of goodwill. Additionally, in response to changes in our industry and changes in global or regional economic conditions, we may strategically realign our resources and consider restructuring, disposing, or otherwise exiting businesses, which could result in an impairment of some or all of our identifiable intangibles, or goodwill.

Income Taxes

We record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with SFAS No. 109, “Accounting for Income Taxes,” the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry-forwards. Deferred tax assets and liabilities are ~~noted,~~measured using the ~~yield~~currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.

We believe it is ~~adjusted prospectively~~more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to ~~reflect~~fully recover the ~~estimate~~remaining deferred tax assets. In the event that all or part of ~~cash flows.~~the net deferred tax assets are determined not to be realizable in the future, a valuation allowance would be established and charged to earnings in the period such determination is made. Similarly, if we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

~~The Company’s~~Our exposure to market risk relates to interest rate risk with ~~its~~our variable rate credit line. As of ~~September 30, 2004, the Company~~March 31, 2005, we had no variable rate debt outstanding on ~~its~~our revolving credit lines. ~~The Company~~We did have variable rate debt outstanding on ~~its~~our long-term debt collateralized by the Kansas real estate. A 10% change in future interest rates on the variable rate credit line would not lead to a material decrease in future earnings assuming all other factors remained constant.

Item 4. Controls and Procedures

~~The Company maintains~~Evaluation of Disclosure Controls and Procedures.We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in ~~the Company’s~~our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the ~~Securities and Exchange Commission’s~~SEC’s rules and forms, and that such information is accumulated and communicated to ~~the Company’s~~our management, including ~~its~~our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As Also, projections of any evaluation of effectiveness to future periods are subject to the ~~end~~risk that controls may become inadequate because of changes in conditions or that the ~~period covered by this report,~~degree of compliance with the ~~Company carried out~~policies or procedures may deteriorate. We conducted an evaluation, under the supervision and with the participation of ~~the Company’s management, including the Company’s Chief Executive Officer~~our principal executive officer and ~~the Company’s Chief Financial Officer,~~principal financial officer, of the effectiveness of ~~the Company’s~~our disclosure controls and procedures ~~pursuant to Exchange Act Rule 13a-14.~~as of the end of the period covered by this report. Based on this evaluation, the ~~foregoing, the Company’s Chief Executive Officer~~principal executive officer and ~~Chief Financial Officer~~principal financial officer have concluded that, ~~the Company’s~~as of March 31, 2005, our disclosure controls and procedures were ~~effective~~effective.

Management’s Report on Internal Control Over Financial Reporting.We are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in ~~timely alerting~~Exchange Act Rules 13a-15(f) or 15d-15(f) as a process designed by, or under the ~~Company’s~~supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to ~~material information relating to~~provide reasonable assurance regarding the ~~Company required to be~~reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management’s assessment was based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management has determined that, as of December 31, 2004, its internal control over financial reporting was effective. Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 was audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report dated March 14, 2005 included in our Annual Report on Form 10-K as filed for the ~~Company’s Exchange Act reports.~~year ended December 31, 2004.

Changes in Internal Control Over Financial Reporting.There ~~have been~~was no ~~significant changes~~change in ~~the Company’s~~our internal ~~controls~~control over financial reporting that ~~could significantly affect the internal controls~~occurred during the ~~last quarter.~~quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

3132


			Page(s)
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated ~~Statements of Financial Position~~Balance Sheets (unaudited) as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003~~2004			3

	Consolidated Income Statements ~~of Operations~~ (unaudited) ~~Three and nine~~For the three months ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~			4

	Consolidated Statements of Cash Flows (unaudited) ~~Nine~~For the three months ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~			5

	Notes to Consolidated Financial Statements (unaudited)			~~6-14~~6-15

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			~~15-30~~16-31

Item 3.	Quantitative and Qualitative Disclosure About Market Risk			3132

Item 4.	Controls and Procedures			3132

PART II.	OTHER INFORMATION

Item 6.	Exhibits and Reports on Form 8-K			32
~~SIGNATURES~~		33

SIGNATURES				34


March 31, 2006	$	35,441,355
March 31, 2007		31,610,568
March 31, 2008		21,824,595
March 31, 2009		9,612,891
March 31, 2010		5,986,128
March 31, 2011		2,868,864

	$	107,344,401


	Three Months			Three Months
	Ended			Ended
	March 31,			March 31,
	2005			2004
Balance at beginning of period	$	202,841,339		$	175,098,132
Income recognized on finance receivables		(32,249,670	)		(23,907,586	)
Additions		12,960,224			21,289,439
Reclassifications from nonaccretable difference		22,959,045			11,130,901

Balance at end of period	$	206,510,938		$	183,610,886


				Weighted					Weighted
				Average					Average
	Warrants			Exercise		Warrants			Exercise
	Outstanding			Price		Outstanding			Price
December 31, 2001		2,195,000		$	4.17		2,195,000		$	4.17
Granted		50,000			10.00		50,000			10.00
Exercised		(50,000	)		4.20		(50,000	)		4.20
Cancelled		(10,000	)		4.20		(10,000	)		4.20

December 31, 2002		2,185,000			4.30		2,185,000			4.30
Exercised		(2,026,000	)		4.17		(2,026,000	)		4.17
Cancelled		(51,500	)		9.72		(51,500	)		9.72

December 31, 2003		107,500			4.20		107,500			4.20
Exercised		(46,500	)		4.20		(67,500	)		4.20

September 30, 2004		61,000		$	4.20
December 31, 2004							40,000			4.20
Exercised							(15,000	)		4.20

March 31, 2005							25,000		$	4.20


	Warrants Outstanding						Warrants Exercisable				Warrants Outstanding						Warrants Exercisable
			Weighted-										Weighted-
			Average		Weighted-				Weighted-				Average		Weighted-				Weighted-
			Remaining		Average				Average				Remaining		Average				Average
Exercise	Number		Contractual		Exercise		Number		Exercise		Number		Contractual		Exercise		Number		Exercise
Prices	Outstanding		Life		Price		Exercisable		Price		Outstanding		Life		Price		Exercisable		Price
$4.20		61,000		1.53	$	4.20		61,000	$	4.20		25,000		1.0	$	4.20		25,000	$	4.20

Total at September 30, 2004		61,000		1.53	$	4.20		61,000	$	4.20
Total at March 31, 2005												25,000		1.0	$	4.20		25,000	$	4.20


September 30, 2005	$	31,304,683
September 30, 2006		30,567,016
September 30, 2007		22,166,778
September 30, 2008		7,618,917
September 30, 2009		2,249,059
September 30, 2010		949,739
September 30, 2011		455,539

	$	95,311,731

	•	net worth greater than $20,000,000, and;

	•	a cash flow coverage ratio of at least 1.5 to 1 calculated on a rolling twelve-month average.


	Options Outstanding						Options Exercisable				Options Outstanding						Options Exercisable
			Weighted-										Weighted-
			Average		Weighted-				Weighted-				Average		Weighted-				Weighted-
			Remaining		Average				Average				Remaining		Average				Average
Exercise	Number		Contractual		Exercise		Number		Exercise		Number		Contractual		Exercise		Number		Exercise
Prices	Outstanding		Life		Price		Exercisable		Price		Outstanding		Life		Price		Exercisable		Price
$13.00		681,820		5.0	$	13.00		96,140	$	13.00		550,149		4.6	$	13.00		124,179	$	13.00
$16.16		15,000		5.1	$	16.16		3,000	$	16.16		14,000		4.6		16.16		5,000		16.16
$26.81 - $29.79		75,000		6.0	$	28.12		11,000	$	27.88
$27.77 - $29.79												74,000		5.5		28.11		14,000		28.06

Total at September 30, 2004		771,820		5.1	$	14.53		110,140	$	14.57
Total at March 31, 2005												638,149		4.7	$	14.82		143,179	$	14.58



	For the three months ended September 30,


			2004						2003
			Weighted Average						Weighted Average
	Net Income		Common Shares		EPS		Net Income		Common Shares		EPS

Basic EPS	$	6,974,765		15,341,801	$	0.45	$	5,529,193		15,148,978	$	0.36
Dilutive effect of stock warrants, options and restricted stock awards				489,859						601,669

Diluted EPS	$	6,974,765		15,831,660	$	0.44	$	5,529,193		15,750,647	$	0.35



	For the nine months ended September 30,


			2004						2003
			Weighted Average						Weighted Average
	Net Income		Common Shares		EPS		Net Income		Common Shares		EPS

Basic EPS	$	19,736,097		15,322,675	$	1.29	$	15,272,214		14,311,587	$	1.07
Dilutive effect of stock warrants, options and restricted stock awards				471,260						1,385,575

Diluted EPS	$	19,736,097		15,793,935	$	1.25	$	15,272,214		15,697,162	$	0.97


	For the three months ended March 31,
			2005						2004
			Weighted Average						Weighted Average
	Net Income		Common Shares		EPS		Net Income		Common Shares		EPS

Basic EPS	$	8,919,832		15,531,779	$	0.57	$	6,011,108		15,303,886	$	0.39
Dilutive effect of stock warrants, options and restricted stock awards				620,383						470,601

Diluted EPS	$	8,919,832		16,152,162	$	0.55	$	6,011,108		15,774,487	$	0.38


Collector FTE at:	12/31/00		12/31/01		12/31/02		12/31/03		09/30/03		09/30/04		12/31/01	12/31/02	12/31/03	12/31/04	03/31/04	03/31/05

One year +¹		109		151		210		241		233		300	151	210	241	298	274	319
Less than one year²		180		218		223		338		301		342	218	223	338	349	294	345
Total²		289		369		433		579		534		642	369	433	579	647	568	664


Average performance YTD	12/31/00		12/31/01		12/31/02		12/31/03		09/30/03		09/30/04
One year +²	$	14,081	$	15,205	$	16,927	$	18,158	$	18,425	$	17,497
Less than one year³	$	7,482	$	7,740	$	8,689	$	8,303	$	8,494	$	9,740


Average performance YTD	12/31/01	12/31/02	12/31/03	12/31/04	03/31/04	03/31/05

One year +²	$15,205	$16,927	$18,158	$17,129	$18,322	$17,846
Less than one year³	$ 7,740	$ 8,689	$ 8,303	$ 9,363	$ 9,815	$ 9,363

(1)		Agreements to purchase receivables typically include general representations and warranties from the sellers covering account holders’ death or bankruptcy and accounts settled or disputed prior to sale. The seller can replace or repurchase these accounts. ~~The Company refers~~We refer to repurchased accounts as buybacks. We also capitalize certain acquisition related costs.

(2)		Cash collections applied to principal (also referred to as amortization) on finance receivables consists of cash collections less income recognized on finance receivables.

(3)		Estimated Remaining Collections refers to the sum of all future projected cash collections on ~~the Company’s~~our owned portfolios. ~~This estimate is derived from the Company’s level yield accounting model.~~ ERC is not a balance sheet item; however, it is provided here for informational purposes.


						Life to Date Purchased Face
						Value of Defaulted Consumer					Finance Receivables, net as of
Account Type	No. of Accounts		%			Receivables⁽¹⁾		%			September 30, 2004		%
Fresh		173,679		3.0	%	$	566,347,968		5.4	%	$	6,040,708		6.3	%
Primary		830,638		14.3	%		2,229,106,782		21.3	%		34,101,105		35.8	%
Secondary		1,606,164		27.6	%		3,113,649,710		29.8	%		40,058,288		42.0	%
Tertiary		2,637,205		45.3	%		2,887,338,520		27.6	%		11,395,904		12.0	%
Other		574,667		9.8	%		1,648,346,090		15.9	%		3,715,726		3.9	%

Total:		5,822,353		100.0	%	$	10,444,789,070		100.0	%	$	95,311,731		100.0	%

(1)		The Life to Date Purchased Face Value of Defaulted Consumer Receivables represents the original face amount purchased from sellers and has not been decremented by any adjustments including payments and buybacks.

(2)		Each state included in “Other” represents less than 2% of the face value of total defaulted consumer receivables.


			Payments due by period								Payments due by period
			Less						More				Less						More
			than 1		1 - 3		4 - 5		than 5				than 1		1 - 3		4 - 5		than 5
Contractual Obligations	Total		year		years		years		years		Total		year		years		years		years

Operating Leases	$	13,378,740	$	1,464,288	$	2,979,738	$	3,143,937	$	5,790,777	$	13,948,468	$	1,774,872	$	3,517,136	$	3,714,682	$	4,941,778
Long-Term Debt		2,221,291		865,133		1,005,888		350,270		—		1,923,640		829,542		936,253		157,845		—
Capital Lease Obligations		688,744		228,338		317,624		142,782		—		571,437		204,055		295,323		72,059		—
Purchase Commitments⁽¹⁾		6,120,608		1,640,608		4,480,000		—		—		11,692,439		9,119,939		2,415,000		157,500		—
Employment Agreements		4,539,440		2,514,657		1,856,869		167,914		—		3,111,268		1,618,788		1,492,480		—		—

Total	$	26,948,823	$	6,713,024	$	10,640,119	$	3,804,903	$	5,790,777	$	31,247,252	$	13,547,196	$	8,656,192	$	4,102,086	$	4,941,778


		31.1		Section 302 Certifications of Chief Executive Officer and Chief Financial Officer.

		~~31.2~~32.1		Section 906 Certifications of Chief Executive Officer and Chief Financial Officer.

~~(b)~~	(b)	Reports on Form ~~8-K.~~8-K.

		Filed ~~July~~February 22, ~~2004,~~2005, issuance of a quarterly earnings press release for the three and twelve months ended ~~June 30,~~December 31, 2004.

		Filed ~~July 28,~~March 15, 2005, entry into a material definitive agreement approving the 2005 base salaries and final 2004 ~~issuance of a press release concerning the appointment of a new director effective August 1, 2004.~~bonuses for our named executive officers.


	PORTFOLIO RECOVERY ASSOCIATES, INC. (Registrant)

Date: ~~October 25, 2004~~April 22, 2005	By:	/s/ Steven D. Fredrickson

		Steven D. Fredrickson
		Chief Executive Officer, President and
		Chairman of the Board of Directors
		(Principal Executive Officer)

Date: ~~October 25, 2004~~April 22, 2005	By:	/s/ Kevin P. Stevenson

		Kevin P. Stevenson
		Chief Financial Officer, Executive Vice President,
		Treasurer and Assistant Secretary
		(Principal Financial and Accounting Officer)